Economics is the study of choices & decisions people make about how to use the world’s...

Economics is the study of choices & decisions people make about how to use the world’s resources.

Meeting unlimited wants & needs of a society with limited resources.

Merriam-Webster Dictionary defines Economics as 1 a : a social science concerned chiefly with description & analysis of the production, distribution, & consumption of goods & services.

People are forced to make decisions & choices

We cannot have everything we need or want.

This condition that ALWAYS exists where we try to satisfy our unlimited wants with limited resources

Economics is the study of people trying to solve this problem.

A permanent loss of some resource

If goods or services are in scarcity, they are gone forever.

Goods & services are scarce, because they are made from scarce resources.

When goods or services are gone for a period of time, they are gone temporarily.

At some point they will come back.

Shortage is different from scarcity

Need: Necessary for Survival◦Examples (air, food, shelter, water)

◦Want: An item we desire, but is not essential to survival.

◦What are some examples of wants?

◦Good-Actual product/tangible Item

◦Service-Something that is provided for you so you do not have to do it.

Factors of production are the resources that go into making a good or service

There are four factors of production◦ Land◦ Labor◦ Capital◦ Entrepreneurship

Defined as everything in the universe that is not created by human beings.

All natural resources that go into making goods & services

Land can be: Air, sunlight, forests, earth, water, minerals & all manner of natural forces or opportunities

Natural Resources are all raw materials in nature used to produce human needs & wants◦ Renewable: Resource that can be replenished or

replaced◦ Non-Renewable: Resource that cannot be

replenished over time

Human-made Resources are all items that are created & produced by humans

Uses capital on land to produce wealth. Refers to human resources or the work that people do.

All workers in the economy that produce goods & services

Physical Capital – Also called capital goods, all of the resources that are man-made.

◦ Man made resources that are used to help produce goods & services (cannot be a human)

◦ Increases productivity by saving time

Human Capital – ◦ The sum of workers skills & talents◦ Increased by: training, education, motivation◦ Both types of Capital are needed to produce

goods & services.

People that take risks to start businesses & keep the economy running.

They gather & implement the factors of production to create goods/services needed or desired in an economy.

Think of Entrepreneurs as people that take land, labor & capital to produce their own goods & services

Define: Operates by traditional ways, customs, religion, and beliefs

 Example: Developing Nations (Third World Nations) - African Nations & Native Americans Advantages:- Keeps tradition and culture alive. - Family Run Disadvantages:  - Not able to mass produce in a short period of

time.- Not “wealthy” by Western standards

Define: Operates by voluntary exchange in a free market and there is no governmental control.

 Example: Capitalism. USA is closest thing to a

Market Economy Advantages- Encourages private ownership- People can become VERY wealthy Disadvantages: Wealth is NOT distributed equally.

 Define: Operates under strict government control,

the economy is ENTIRELY controlled by the government

 Examples: Former Soviet Union, China & Cuba Advantages:  ( IN THEORY) Wealth is distributed

equally. Everyone is taken care of, no poverty No competition Disadvantages: Everyone is treated equally

regardless of work, work ethics, or education.

Define: Most modern economies: Market based with little government intervention

Operates by mixing private ownership and public ownership

 Example: Most Economies*, Socialism Germany, France, United States & Canada Advantages: Government rules and regulations

ensures businesses will not get out of control and are held accountable

 Disadvantages: Governmental rules limits the

individuals free reign over their business

Adam Smith: Wealth of Nations

Laissez Faire: “hands off”Invisible Hand: The economy will regulate itself

Karl Marx: Communist Manifesto & Das

Kapital

Constant struggle between workers & owners

Workers add value to goods but do not receive the profits

against market economies

John Maynard Keynes

(Keynesian Theory)

The General Theory of Employment, Interest and Money

Aggressive Fiscal Policy Written after the Depression Cut Taxes while increasing

government spending This will increase deficit

spending Gov’t spending more than it

is taking in

In the United States mixed economy Three sectors, or elements, that interact: ◦Households◦Businesses◦Government

Economists use the CFM to explain the interaction among these three sectors.

Each sector of the economy contributes to another.

Household & Firms– Factor Market

1.Where firms purchase or rent land

2.Firms hire workers & pay salaries for labor

3.Borrow money from households to purchase capital households interest or profits in return.

Product Market1.Households purchase products

made by firms

Government in the Factor Market1. Government purchases land, labor, & capital from households2. Government collect taxes from firms.

Government in the Product Market1. Government purchases goods & services = building, telephones, computers, fax machines2. Government provides goods & services = roads3. Government collect taxes from households

Govt

TaxesTaxes

Govt SpendingGovt Spending

Gross Domestic Product (GDP): The total market value($ value) of all the goods & services produced within the borders of a nation during a specified period.

Usually reported on an annual basis◦ Per Capita GDP: A nations GDP divided by its

population

Consumer Price Index (CPI): Calculated each month by the Bureau of Labor Statistics◦ It measures the change in prices (inflation) of a

“market basket” Ex. Food, housing, medical care, entertainment

NOT a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock.

Its timing is random & unpredictable

A business cycle has four phases.

Expansion

Contraction

Trough

Peak

speedup in the pace of economic activity or Rise in GDP

Recovery: right after a trough, economy is getting better

Prosperity: right before a peak, economy is at its best

economic growth

slowdown in the pace of economic activity

Economic decline marked by falling GDP

Recession: 6 straight months of contraction

Depression: Especially long contraction

lower turning point of a business cycle, where a contraction turns into an expansion

GDP stops falling

upward turning of a business cycle

When GDP stops rising

**A trough & peak both represent a turning point in the business cycle**

The National Debt is the total amount of money the Federal Government owes to treasury bondholders.

A bond is essential an IOU issued by the government as a way for them to borrow money.

Reduces the funds available for businesses to invest.

The government must pay interest to bondholders, the more the government borrows, the more interest it has to pay.

Roughly, to pay off the National Debt today, each citizen would have to pay just over $40,083.53

http://brillig.com/debt_clock/

http://www.usdebtclock.org/

Sole proprietorship – a business owned and managed by a single individual.

According to the IRS 75% of all businesses in the US are sole-proprietorships but these generate only about 6% of US sales.

Advantages

- Easy start-up (business licenses, site permit, name of business)

- Sole receiver of profit- Full control of business- Easy to discontinue- Not subject to special

business taxes

Disadvantages

- Unlimited personal liabilityoLiability is a legally bound

obligation to pay debts. Sole proprietors are bound to all of their business debts

- Limited access to resources- Limited life – business lack

permanence beyond the life of the sole proprietor

Partnerships – a business organization owned by two or more persons who agree on a specific division of responsibilities and profits.

Advantages

- Easy start-up- Shared decision making- Specialization – each

partner can bring his or her talents

- Larger pool of assets – helpful when the business needs to borrow money

- Not subject to special business taxes

Disadvantages

- Unlimited liability- Each general partner is

bound to debt incurred and responsible for paying this debt

- General partners do not have absolute control over their business

- Potential for conflict

Corporations – a legal entity owned by individual stockholders.

Stockholders own shares of stock – a certificated ownership in a corporations.Stockholders are part owners of the corporation.

CorporationsCorporations

Advantages

- Limited liability for owners

- Transferable ownership – owners can sell stock and get money in return

- Long Life – business does not end with the death of the owners.

- More potential for growth

Disadvantages

- Expensive and difficult to start up

- Double taxes oCorporations pay taxes on income.oStockholders receive dividends

(profits paid out to stockholders)oDividends are also taxed

- Potential loss of control by the founders – Board of Directors usually run corporations.

- More legal requirements and regulations

Horizontal Merger – joining of two or more firms competing in the same market with the same good or service

Vertical Merger – joining of two or more firms involved in different stages of producing the same good or service.

Conglomerate – merging of more than three businesses that make unrelated products

Multinational Corporation – a large corporation that produces and sells its goods and services throughout the world.

Advantages

- Provides jobs and products around the world

- Efforts to spread new technology around the world

- Increase standard of living in many poor countries

Disadvantages

-Low wages

-Poor working conditions

A business organization in which a firm enters into a contract relationship with individuals using the firms trade name ,using the firms guidance & rules of operation for a fee.

Examples: Subway, McDonalds & 7-Eleven.

Advantages Disadvantages

When all other things equal, as the price of a good or service increases, the quantity demanded will decrease.◦ The opposite is also true. As the price of a good or

service decreases, the quantity demanded will increase

◦ TRANSLATION: THE MORE EXPENSIVE SOMETHING IS, THE LESS PEOPLE

WILL WANT TO BUY IT…DUH!!!!!!

◦ CONSUMERS HAVE A “PRICE MOTIVE”

The demand curve has a negative slope, consistent with the law of demand.

When all other things equal, as the price of a good or service increases, the quantity supplied will increase & vice versa.

TRANSLATION: IF PEOPLE ARE WILLING TO PAY A HIGH PRICE FOR

AN ITEM, PRODUCERS ARE GOING TO MAKE MORE OF THAT ITEM TO INCREASE PROFIT.

SUPPLIERS HAVE A “PROFIT MOTIVE”

The supply curve has a positive slope, consistent with the law of supply.

In economics, an equilibrium is a situation in which:◦ No change ◦ Quantity Demanded (QD) equals Quantity

Supplied (QS)◦ It is where the supply curve intersects the

demand curve◦ Market clearing price: where the price of the item

is set

Equilibrium occurs at a price of $3 & a quantity of 30 units.

A shortage occurs when quantity demanded exceeds quantity supplied.◦ A shortage implies the market price is too low.

A surplus occurs when quantity supplied exceeds quantity demanded. ◦ A surplus implies the market price is too high.

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A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand.

Factors that shift the demand curve include:◦ Change in consumer incomes◦ Population change◦ Consumer preferences◦ Prices of related goods:

Substitutes: goods consumed in place of one another Complements: goods consumed jointly

This demand curve has shifted to the right. Quantity demanded is now higher at any given price.

Things other than price that influence quantity supplied produces a shift in the supply curve or a change in supply.

Factors that shift the supply curve include:◦ Change in input costs (fop)◦ Increase/decrease in technology

Assembly line, Innovations, Inventions

◦ Change in size of the industry More/less people that are actually making the

product

For an given rental price, quantity supplied is now lower than before.

The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price & lower quantity.

A price ceiling is a legal maximum that can be charged for a good. Price cannot go above the ceiling.◦ Results in a shortage of a product◦ Common examples include apartment rentals & credit cards

interest rates.

A price floor is a legal minimum that can be charged for a good. Price cannot go below the floor.◦ Results in a surplus of a product◦ Common examples include soybeans, milk, minimum wage

**you can not go above the ceiling or below the floor**

A price ceiling is set at $2 resulting in a shortage of 20 units.Always creates a shortage

A price floor is set at $4 resulting in a surplus of 20 units.Always creates a surplus